Thanks. I might have a go at charting this over the last few years. Meanwhile, TUT just inverted again so we are looking for another entry. Then again, if one expects an equities sell-off around Sep-Oct seasonal low, TUT could hit a multi-year low about then as well. Might want to keep the powder dry for a monster position then. Hmm ...
So this is what PIMCO is doing. What do they say? Q: How are these primary conclusions from the Secular Forum influencing PIMCO's overall investment strategy? McCulley: The overriding theme of our secular investment strategy is that we are anticipating an increase in risk premiums across a whole array of assets. The slope of the yield curve is also called the term premium and we are watching daily as the term premium comes back into the bond market. Put differently, the conundrum that Mr. Greenspan made famous is being unwound, as the market is putting a risk premium back into the slope of the yield curve. The market is also putting risk premiums back into the emerging markets and we think that we are going to see risk premiums come back into the corporate bond market. We are also seeing an increase in volatility, which increases implied volatility in options, which is another form of risk premium. So our overall theme right now is to be risk-averse, as risk premiums--which are skinny--widen back out. Apparently PIMCO feels that just loading up in treasuries might cause them to underperform their bogey (Lehman Agg). So if risk premiums are so low why not buy credit protection - e.g. long default swaps?
In late May Pimco's Paul McCulley told John Mauldin the study (see link) was a 'must read.' I'm currently only a few pages into it but it explains perfectly Pimco's strangle position. The study outlines how central bankers have come to a point were they are positioned to aggressively defend 'inflation' somewhat below current levels and above 0%. In other words, central banks are determined to defend both upside and downside to interest rates. As such, Pimco's strangles are effectively stepping in front of central bank policy (as Pimco sees it.) http://www.bis.org/publ/work205.htm http://www.frontlinethoughts.com/article.asp?id=mwo052606
Right, do as I say, not as I do. What complete BS. Selling the bottom decile in bond vols into a diametric-expectation of steepening and concomitant increase in vols and spreads.
If any of you numbnuts had actually read McCulley's piece, instead of taking snippets out of context, you would see his comments address a 3-5 year outlook. That is not inconsistent, whatsoever, with putting on some Sept strangles just after a shart rise volatility. *I do like 98% of what you post risk-dude, but the post above wasn't well considered. We're all guilty at one time or another ...
fair enough... used to read him for entertainment value... i only wish i cld set my hands on the performance data for his oft-cited Marc Faber Ltd fund... you wouldn't happen to have that by any chance? (apologies all, will be my last off-topic post on this faber thing)
I'm curious about PIMCO's position. It seems like they are taking a lot of risk. Can anybody quantify it (or estimate it)? In which accounts are these strangles/spreads/etc taking place? (I assume it's not the mutual funds.) How much does PIMCO manage in those accounts? I am curious because I am entertaining the possibility of a 1998 style crash with GM/F taking the place of Russia and somebody, maybe PIMCO or a bunch of "Neiderhoffers" who sell options (thus short volatility) taking the place of LTCM.
Talk about numbnuts... you go ahead and play lemming with PIMCO and their 5% vol sale. You're talking out of your ass -- bond vols have not risen; to the contrary, they've recently fallen off a cliff. The fact remains that they are hunting for alpha in all the wrong places. Another fact is that they've ramped-up their sale of vol as bond vols have hit new lows; all the while preaching widening of risk-spreads. The only logical motivation is to preach panic in hopes it will mark-up vols, but it hasn't happened.
This is not the first time PIMCO has sold vol, in fact, positions of this magnitude are about normal for them (they were short about 150,000 March 107-111 strangles this year). What is worrying to me are the vol levels and the fact their core curve position is a steepener and generally vol levels will explode as the curve steepens from its normal flat levels the past 4 years or so. These strangles are in their standard mutual fund accounts, the Total Return fund should have CBOT and CME positions in there, not to mention other OTC derivatives.